Blueprint for retirement

Winnipeg planner's new book cuts through conundrum

Hey there, time traveller!This article was published 29/4/2011 (2050 days ago), so information in it may no longer be current.

Saving and planning for retirement are difficult enough.

But figuring out how to manage retirement finances is often just as complicated, if not more so. In the accumulation years, generally all you need to manage is one to three streams of income at most to cover the monthly costs and set aside a little bit -- or a lot -- for the future.

In retirement, managing several streams of income is the norm, and figuring out how to use them efficiently is a skill set many retirees end up learning on the fly.

Retirement income planning specialist Daryl Diamond has been working with Winnipeggers for more than 15 years, specifically helping them build retirement income plans. That is, financial plans dealing only with how to manage cash flows from work pensions, RRSPs, non-registered savings and government programs -- such as OAS and CPP -- and maybe a little part-time work thrown in for good measure.

Nearly 10 years ago, Diamond authored Buying Time: Trading Your Retirement Savings for Income and Lifestyle in Your Prime Retirement Years to help near-retirees and retired folk deal with this income octopus.

The book sold about 12,000 copies over two editions, and when it came time to make revisions for a third edition, Diamond found the retirement landscape had changed dramatically in the last few years.

So Diamond decided to write a new book entitled Your Retirement Income Blueprint: A Six-Step Plan to Design and Build a Secure Retirement to address these shifts in the financial landscape.

"We wanted to put something out that was less formal of a read than Buying Time and more connective with the consumer," says Diamond, with Diamond Retirement Planning.

"And I like to say that this book also challenges some of the old-school thinking."

The official launch for Your Retirement Income Blueprint is this Monday at 7 p.m. at McNally Robinson at Grant Park, but here's a preview of some of the topics covered in the book -- in case you're such a personal-finance junkie you just can't wait.

So just what kind of "old-school thinking" does Diamond turn on its head?

For one, he discusses at length why it's important to be tax-efficient, but that doesn't necessarily mean paying as little tax as possible every year during retirement. The goal, he writes, is not to be paying more tax than you need to in retirement.

For instance, retirees often mistakenly want to defer taxes early on in retirement by avoiding withdrawals from RRSPs or RRIFs (registered retirement income funds).

During work years, RRSPs are an advantageous means to defer taxation because assets can grow within the account without the drag of taxes. The problem is withdrawals from these accounts are fully taxable in retirement, and many retirees believe it's better to hold off withdrawing this money until they absolutely have to at age 71, when RRSPs must be converted to RRIFs and yearly withdrawals of at least seven per cent are mandatory.

"In most cases, that's not an advantageous thing to do, because you could create a huge tax problem for yourself starting at 71," Diamond says.

Most people are better off figuring out how to draw income from RRSPs/RRIFs before that date for greater tax flexibility and efficiency.

Diamond provides an example of such a situation in the book. Bob, he writes, is 60, single and collects a work pension and CPP, earning $46,000 a year. He is in the second tax bracket and will be for the rest of his retirement. The next upper bracket starts at about $83,000. Any withdrawals now from his RRSP will be taxed, but they won't bump him up to a higher rate. If he waits until 65, however, future RRSP or RRIF withdrawals could reduce his OAS and age credit. So Bob may be better off withdrawing from his RRSPs over the next four years and reinvesting that money -- perhaps in a tax-free savings account (TFSA) -- or using it for major expenses.

Diamond also discusses how many retirees misunderstand risk.

"A lot of times, what people assume to be risk is investment risk, and there are several other ones to go with it, including longevity risk, inflation risk, taxation risk and health-cost risk, and people can't deal with those other risks at three per cent rates of return," he says.

Essentially, retirees can't rely on low-yielding GICs alone -- in most cases -- to produce returns that will preserve capital over what could be a 30-year period, especially when that money may not have to provide only for the fun stuff early on, such as travel, but also long-term costs such as assisted living or leaving behind an estate for children.

He writes that none is a panacea for retirement income-planning challenges by themselves, but as part of a larger plan, they help deal with the three headwinds of retirement financial well-being: taxation, inflation and fees.

These are just a few points covered in what is a pretty comprehensive piece of work at 224 pages -- so much so, you might feel as though you're an expert on the subject after reading it.

"If people are do-it-yourselfers, they would find it an inordinately helpful book," he says.

Still, a little advice from a professional is recommended.

"We've always felt retirement planning is best done with someone who is skilled in the discipline," he says. "Just because you know the order of the hands in poker doesn't mean you're ready to go into a tournament."

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The world beyond GICs

Your Retirement Income Blueprint provides a few alternatives to investing in GICs for preservation of capital while producing income. Author Daryl Diamond says GICs do have their place as investments, but given current rates of return, retirees with larger chunks of non-registered income -- those outside of RRSP and TFSAs -- should examine these options:

Corporate-class mutual funds: If you have non-registered money, corporate-class mutual funds are a good option because they're designed with tax efficiency in mind. Basically, they're structured like a corporation, containing a variety of investment choices. The fund company can manage earnings and losses within this structure in a tax-efficient manner so distributions to investors result in as little tax as possible. Corporate-class funds also allow investors to move from one investment strategy (domestic equity, for example) to another (U.S. equity) without triggering taxes. Effectively, they offer the same tax sheltering as RRSPs.

Corporate-class funds can also provide tax-efficient, regular income because payments are considered capital gains, of which only 50 per cent are taxable. This contrasts with GIC interest income, which is fully taxable. They can also be set up to provide income payments from the invested capital, which isn't taxable.

Life annuities: Most people are aware they can turn over a chunk of their capital to an insurance firm in exchange for a guaranteed revenue stream for life. Called a life annuity, Diamond says it can be one effective cash-flow stream of many to provide a secure income for retirees.

Life annuities can actually be a good guaranteed income stream for retirees in their late 70s or early 80s, too. The reason for this is mortality credits, he says. Basically, these are how insurance companies assess annuitants' life expectancy. The less time the insurer thinks you will live, the greater the annuity payment will be.

Diamond says designating a portion of retirement capital later in life to an annuity can act as a hedge against longevity risk, providing an annuitant a guaranteed payment that potentially exceeds returns found in financial markets over the same time period.

Prescribed taxation annuities: Annuities can be a tax-efficient way for a portion of non-registered assets to provide income because they receive prescribed taxation treatment. Under normal circumstances early on, the annuity payment would mostly consist of interest, which is fully taxable and later on, the payments would consist of mostly a return on capital, which isn't taxable. But prescribed annuities provide a blended payment of interest and capital over the entire life of the annuitant, providing a steady source of income that is tax-efficient in early years.

Tax-deferred annuity: This strategy involves buying an annuity with a portion of non-registered money and investing the rest in a corporate-class fund. The money in the fund grows mostly tax-sheltered, while the annuity provides income that is taxed more favourably than interest income from a GIC.

For example, $100,000 invested in a GIC at 3.5 per cent for two five-year terms would provide $2,415 in after-tax (at the 31 per cent marginal rate) annual income. That same $100,000, with $21,281 invested in an annuity for a 10-year term would provide the same annual income. The remainder, $78,719, could be invested in a corporate-class mutual fund that at the end of 10 years would grow to about $140,000 with an average annual return of six per cent. Even with a 2.83 per cent average annual return, the money would grow to $100,000 at the end of 10 years.

Insured annuity: Also called a back-to-back annuity, this strategy involves buying a life annuity, using a portion of the income it generates to pay for the premium on a life insurance policy, and then using the life insurance benefit to leave a non-taxable source of funds for the annuitant's estate upon death.

At a 31 per cent marginal rate, the annuitant's $200,000 investment in a joint life annuity -- depending on health -- would pay an annual net income of about $7,500. In contrast, a GIC paying 3.5 per cent would generate $4,900 net annually. Under normal circumstances, the annuity uses up all the capital, whereas a GIC would return the original investment. Yet, because a portion of the annuity-- $2,710 of the $11,242 gross annual income -- can go toward paying for life insurance with a $200,000 benefit, the capital that went toward purchasing the annuity would be replaced by the benefit upon death of the last survivor, providing tax-free money to the estate.

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